accounting essay

The Purpose Of A Business Plan Accounting Essay

Published: 23, March 2015

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The most commonly dispensed advice for entrepreneurs starting up a new venture is that they should write a business plan. Hills (1988) stated that university entrepreneurship educators regarded writing a business plan as the most crucial part of entrepreneurship courses. One indication of their importance is that about 10 million business plans are written every year, worldwide (Gumpert, 2002). No doubt business planning is now embedded as a significant, perhaps even key, feature of the ambitious entrepreneur's tool kit.

What is the purpose of a business plan?

In new ventures just starting up, business planning may serve a variety of purposes since these companies do not yet have substantial experience to be used as an alternate for planning. The business plan will focus on the growth prospects for the market and strategic tactical considerations in order to secure some form of funding (Friend and Zehle, 2004).

Business planning could help companies identify attributes of the financial context and the impact of the individual entrepreneur decision as to whether to prepare a business plan for start-ups seeking to raise external, equity finance. It may also be used, for instance, to communicate the vision, objectives, and the most common reason being to get approval or finance for a project and to manage it (Friend and Zehle, 2008). Alternatively, it may be argued that business planning practices are less applicable in new ventures, since little is known about the ways in which business plans are actually used in new ventures and the extent to which they are regarded useful by the entrepreneurs and managers themselves.

Delmer & Shane (2003) suggest that business planning help entrepreneurs facilitate goal achievement, make quick and more effective decisions, and more rapidly turn goals into concrete operational activities (2003; 2004). In addition, studies such as those by Perry (2001), Delmar & Shane (2003), Laio & Gartner (2006) all point there is some evidence that business planning leads to persistence. Nevertheless, persistence on its own could be a poor measure of success. Entrepreneurs may be better off analysing failure beforehand, instead of executing an activity that will possibly result to failure and excessive resource expenditure. The issue of persistence particularly has not convincingly been researched, since remarkably few studies contain the indispensable data determine whether persistence leads to performance, or not.

Business planning has long been considered as a foundation of management (Gulick, 1937; Fayol, 1949; Koontz & O'Donnell, 1955). Although, there has been considerable debate regarding the benefits of formal planning activities, such as writing business plans, may bring for ventures and whether there is a positive relationship between business planning and performance (Gruber, 2007). Not enough attention may have been given to issues that direct entrepreneurs to take part in those planning activities.

A primary role of planning is to help firms and individuals come up with the best alternatives to opportunities and threats confronted in its environment (Chakravarthy, 1987). Hence, the success of entrepreneurs to write a business plan may directly be influenced by the profile, as well as context of the new venture and personalities of the individual entrepreneurs. For example, more capable entrepreneurs may feel writing a business plan is poor use of time as they could effectively convince investors to invest in their venture without a business plan. In contrast, entrepreneurs that possess little information about the market and have lower entrepreneurial experience may feel that a business plan is both informative and instructive. Consequently, the entrepreneurial literature is divided between the relative benefits of planning for a new venture (Matthews & Scott, 1995; Shane & Delmar, 2003), whereas others caution against excessive business planning (Allison, Chell & Haye, 2000).

It is therefore likely that profile and context of ventures with business plans will vary especially from those without business plans as a result of selection bias. Hence, a significant issue for research pursuing a link between preparation of a business plan and performance is that it can easily be confused between the impacts of planning on performance and variance in business performance due to selection bias (Burke et al, 2010).

Financial information

Business plans traditionally consist of two different structures, the working plan and the investment plan. Working plans mainly focus on the internal requirements of the business, such as the operational decisions and employee involvement. Investment plans primarily centre upon "selling the business" to external investors and focus usually on financial needs (Fry and Stoner, 1985). Based on the internal information, both plans many include significant business strengths and general financial capabilities of the business. However, working plans may additionally require internal information concerning exit plans, operational competences and other exploitable weaknesses, while investment plans need internal information about more specific financial analysis for example, balance sheets, income statements, cash flows and the breakeven analysis. This is due to the different types of business information to whom the plan is being prepared for. Working plans may help to guide the firm internally and therefore require more operational information, whereas investment plans are meant to attract external investor to fund the business and hence it is necessary to provide them the information that will most appropriately help them make those decisions.

Delmar, F & Shane, S. (2003). Does business planning facilitate the development of new ventures? Strategic Management Journal, 24: 1165-1185.

Deloitte (2010). How to write an effective business plan. [pdf] Available at: http://www.deloitte.com/assets/DcomLuxembourg/Local%20Assets/Documents/Brochures/English/2010/lu_writebusinessplan_01042010.pdf. [Accesses 12 October 2012].

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